burford capital 2016 litigation finance survey

2016 LitigationFinance SurveyBridging the gap: Clients, law firms and financial institutions

BURFORD BAROMETER

Introduction

When Burford was founded in 2009, theeconomic pressures that shook the business oflaw in the wake of the 2008 financial crisishelped drive strong demand for third-partycapital—from clients that couldn’t afford to payhourly fees to hire their firm of choice, and fromlaw firms that could neither take on morecontingent risk nor afford to turn clients away.Litigation finance bridged the gap between clientand law firm needs—as a tool of economicnecessity.

Since then, litigation finance has continued togrow and remains an important mechanism tobridge gaps between client and law firm needs.However, it is increasingly used not out ofeconomic necessity but as a matter of choice—as a smarter, more efficient means of unlockingthe asset value of pending litigation and addingcash flow to businesses and law firms.

Litigation finance and its evolution as anincreasingly common form of corporate financeare subjects of Burford’s 2016 Litigation FinanceSurvey, which draws on independent researchconducted with private practice and in-houselawyers in the US in late 2015 and early 2016.

Among other things, we found that litigationfinance is growing. Indeed, both private practiceand in-house lawyers predict still more growth inlitigation finance in the years ahead—and indeedthis view rose 50 percent among private practicelawyers and 35 percent among in-house lawyerscompared to our 2014 data.

Building on our three prior surveys of litigationfinance in the US, as well as similar studies inthe UK, this year we also expanded the researchto provide a broader view of the business of law.

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Bridging the gap: Clients, law firms and financial institutions

© Burford Capital 2016 – All rights reserved

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Reported use of litigation finance has grown significantly—4 times as many lawyers say their firms have used litigation finance directly vs. 2013

7%11%

28%2013 2014 2016


2016 Litigation Finance Survey

1. Corporate legal budgets remain under pressure. GCs expect their firms to offer alternative options to finance claims.

2. Law firms are under pressure to compete;; to do so they must meet client demand for risk sharing and innovation.

3. Litigation finance is growing explosively.

4. Law firms and clients are increasingly using litigation finance not out of economic necessity but choice—as a form of corporate finance.

5. Understanding remains the greatest barrier to the use of litigation finance, and firms in particular have much to gain from educating clients.

4 © Burford Capital 2016 – All rights reserved

Key findings

Nearly half of private practice lawyers are confident firms will increasingly seek financing to

fuel growth

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I. Present and future business challenges for clients and law firms


Clients’ biggest business challenges

• The pressure on clients’ legal budgets keeps rising. More than nine out of ten clients (94%) say that increased pressure on legal budgets, staffing and spending is a significant challenge today.

• Clients don’t expect the pressure to fade anytime soon: in-house respondents put budget pressure among the top three challenges to be faced by legal departments five years from now.

• Nearly a third (29%) of clients say they have been forced to forego bringing litigation that they believed was meritorious and would have produced recoveries for their companies because of budget and capital constraints.

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Clients are still feeling the heat on costs—and it’s getting worse

94%of clients say increased pressure on legal budgets, staffing and spending is a

challenge



• Clients also express concern about how ongoing legal expenses depress financial results for their companies;; 87% identify this as a significant challenge today, and 84% predict it will remain a significant challenge in years to come.

• It’s therefore not surprising that more than one in five (23%) have dropped a claim they were pursuing because the company wasn’t willing to continue to have the associated legal expenses hitting its bottom line.

• Clearly, clients look to their firms to help them resolve the cost pressures: almost nine out of ten point to the need for innovation from outside counsel as a major concern today.

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Clients are still feeling the heat on costs—and it’s getting worse

9 out of 10 clients want more innovation from

their firms.



94%88% 88% 87% 85% 83% 81%

75%

84% 85%

66%

84%78%

67%63% 65%

Increased pressure on legal budgets, staffing and spending

Cost-cutting generally

Need for innovation from outside counsel

Ongoing legal expenses depress financial results

Shareholder pressure to

contain legal fees

Difficulty enforcing judgments

Lack of funding Need for new ways of financing litigation costs

Biggest business challenges facing clients now Biggest business challenges facing clients 5 years from now



29%

14%

3%

23%

54%

71% 86% 97% 77% 46%

We have not pursued litigation because of budget or

capital constraints

We have ceded defense to our insurance carrier because

of budget or capital constraints

We have stopped pursuing a claim due to shareholder

pressure

We have stopped pursuing a claim because legal expenses were hitting the company

bottom line

We have shifted work to a firm because it proactively offered alternative fee

arrangements

TRUE FALSE


Firms’ biggest business challenges

• 100% of private practice lawyers identify pressure from clients for discounted or alternative fees as a major business challenge today.

• This concern is correctly placed—more than half (54%) of in-house respondents say they have shifted work to firms that proactively offered alternative fee arrangements, including litigation finance.

• The need for increased business development is another major trend-line of concern, with 97% of lawyers identifying it as a challenge.

• Increased competition and difficulty differentiating from the competition is the challenge most private practice lawyers (83%) identify as a concern in the future.

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Firms’ biggest challenge in the multi-billion dollar market is staying competitive

Over half of clients have moved work to firms that proactively

offered alternative fee arrangements

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Firms’ biggest business challenges

100%97%

90% 88%

81%

68%74%

83%

76% 75%

Pressure from clients for discounted or alternative fees

Increased need for business development

Increased competition or difficulty differentiating

Reduced resources to serve clients

Lack of capital to invest back in firm

Biggest business challenges facing firms now Biggest business challenges facing firms 5 years from now


II. Innovation and legal finance


Innovation and legal finance

• Among the challenges identified by over eight in ten (81%) private practice lawyers both now and in the future is a lack of capital to invest back into the firm, an obstacle that is in large part due to the peculiar capital structure of the partnership-based law firm business model.

• Both clients (41%) and private practice lawyers (48%) are confident law firms will increasingly seek outside financing to fuel growth.

• However, the research reveals skepticism that such outside capital will come through an alternative business structure approach, as is happening in the UK: nearly four in ten clients and private practice lawyers (38%) agree that an ABS approach is likely, 30% are neutral and 32% disagree.

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Firms want more access to outside capital—and see portfolio financing as an innovative solution

of private practice lawyers cite the inability to invest capital

back into the firm as an obstacle

81%



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48%

35%

17%

41%

46%

12%

Agree Neutral Disagree

In the future, law firms will seek outside financing to fund growth

Firms Clients

37%

20%

43%

38%40%

22%


In the future, law firms will move to alternate business structures, where non-lawyers may manage or have ownership-type interest, as is happening in the UK

Firms Clients



• Only 8% of private practice lawyers and 25% of clients believe that the billable hour is obsolete.

• However, the data do not show clear agreement on this subject. While two thirds (67%) of private practice lawyers definitively reject the billable hour, just under half (49%) of clients agree.

• Separate interviews with private practice lawyers affirmed that the billable hour is problematic. As one said, it represents an “irreducible conflict” between clients and firms. Yet all noted that neither firms nor clients have replaced the billable hour with a viable alternative.

• The billable hour isn’t going away–but clients will continue to seek alternative fee arrangements. Firms must present innovative financial structures that reduce pressure on client budgets without putting undue pressure on firm finances.

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The death of the billable hour is greatly exaggerated—and long overdue

The billable hour represents an “irreducible

conflict” between clients and firms.



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8%

25%

67%

25% 26%

49%


For the most part, lawyers disagree that “The billable hour is obsolete”

Firms Clients

36%40%

24%

50%

41%

9%


Yet clients are significantly more likely than firms to agree that “I prefer contingency to finance”

Firms Clients



• Lawyers and their clients agree that sharing risk is good—but they disagree about how to share it. Sharing the risk of a high-stakes claim is viewed as a good thing by a strong majority—71% of private-practice lawyers and 60% of in-house lawyers.

• But 38% more in-house lawyers prefer contingency to finance—and far more private-practice lawyers agree that sharing the risk with a non-recourse third party makes sense.

• This is tension in the business of law: clients happily embrace contingency, because it shifts the risk to firms. But firms can only tolerate so much risk. Firms have been quicker to embrace litigation finance as a way to hedge their risk, or to stabilize their balance sheets for the duration of contingency cases.

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There’s still misalignment on the best approach to risk-sharing: contingency or litigation finance?

more in-house lawyers than private practice lawyers

prefer contingency

38 %



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71%

19%

10%

60%

36%

4%


Sharing the risk of high-stakes litigation is a good idea

Firms Clients

63%

22%

15%

40%37%

23%


Sharing the risk of litigation with a third party makes sense

Firms Clients


III. Explosive growth of litigation finance


Growth of litigation finance

• Three times as many private practice lawyers say their firms have used litigation finance directly (28%, vs. 11% in 2014 and 7% in 2013).

• Over half (55%) have talked to their clients about litigation finance, and 40% have been asked about it by their clients.

• Over one third (31%) feel it’s good practice to explain litigation finance to clients at the start of every case.

• In interviews, lawyers cited a bevy of forces propelling this growth. Cost pressures, clients’ desire to offload risk and increased competition among firms were the most commonly mentioned.

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Lawyers cite a significant increase in direct experience with litigation finance

55%of private practice lawyers have talked to their clients about litigation finance



21

40%

40% of clients have actively asked about litigation finance

28%

Almost a third of private practice lawyers have used litigation finance



• One in five (21%) say they have experience with single case litigation finance, and one in four (26%) say they have used expense funding (where the lawyer takes a matter contingently but seeks financing for disbursements).

• Almost one in ten (9%) of private practice lawyers say they have direct experience with financing litigation portfolios.

• Over two thirds (67%) say they are aware of it, and almost six in ten (58%) private practice lawyers say they would consider partnering with a third-party financier to fund a litigation portfolio.

• Clients have been slower to embrace portfolio financing, with a minority of clients focused on pursuing such an arrangement—something we predict will change given Burford’s $45 million portfolio financing for a FTSE 20 company.

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Law firms are increasingly savvy about various forms of litigation finance

of private practice lawyers would consider partnering with a third-party financier to fund a

litigation portfolio

58%of private practice lawyers cite

the inability to invest capital back into the firm as an obstacle

81%



9%

21%

26%

46% 47%

42%44%

69%65%

63%60%

Defense funding Portfolio funding Single case funding Expense funding

Awareness and consideration across all types of litigation finance

Have Used Would Use Aware Of


IV. Litigation as corporate finance


Litigation finance as corporate finance

• Two thirds (66%) of private practice lawyers and almost half of clients (46%) have no difficulty thinking of a lawsuit as a financeable asset just like any other intangible.

• The research generated almost identical responses concerning litigation as a financeable asset: 63% of private practice lawyers and 45% of clients agree.

• Over half (53%) of private practice lawyers agree that litigation finance is just another form of corporate finance.

• Almost six out of ten (58%) of private practice lawyers believe that clients that can afford to pay their lawyers still benefit from litigation financing because of positive impact on accounting outcomes or to reserve capital for other business needs.

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Litigation is a useful tool that offers accounting and liquidity benefits

Over half of private practice lawyers agree that litigation

finance is just another form of corporate finance

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• Once again, clients are significantly more likely (46%) to remain undecided—revealing a neutrality that arguably suggests a need for education by outside counsel.

• Only about one in ten (12%) of clients and lawyers disagree that litigation finance is a useful tool. But while almost two thirds of outside counsel agree that it is a useful tool, about one half of clients (52%) are still undecided.

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Litigation is a useful tool that offers accounting and liquidity benefits

46%of clients still need education on litigation

finance



35%

53%

58%

66%

80%

41% 41%39%

46%

71%

Working with outside financial professionals lets lawyers focus on being lawyers

Litigation finance is just another form of corporate

finance

Clients that can afford to pay will benefit from litigation finance given its positive accounting impact or to

reserve cash for the business

Litigation is a financeable asset

Law firms will increasingly hire professionals to run better as businesses

Firms that Agree with Statement Clients that Agree with Statement



182

189

194

197

204

226

238

239

266

Preference for billable hour arrangements

Client's pending litigation "isn't big enough" for financing

Lack of understanding of litigation as a financeable asset

Preference for contingency arrangements

Lack of suitable matters

Ethical concerns

Perceived cost of financing as "expensive"

Ignorance of available financing options

Lack of awareness or understanding

What do you view as the biggest barriers to litigation finance today?

Weighted Rank (Score)


Lack of awareness remains the biggest obstacle to use of litigation finance

Conclusion

One of the most telling findings from the research is this: according to private practice lawyers, the top two barriers to litigation finance today are 1) lack of awareness and understanding and 2) ignorance of available financing options.

Taken as a whole, this year’s research depicts the business of law at an historic inflection point. The conditions are ripe for private-practice lawyers to embrace litigation finance. Those who do will demonstrate their ingenuity by helping their clients restrain costs (without discounting fees) and spread risk. But firms must take it upon themselves to educate their clients, who lack sufficient understanding of alternative financing methods. The survey shows that clients are willing to consider litigation finance, that they want to share risk and that above all they expect and want innovation from their outside counsel. For law firms, this presents an extraordinary opportunity to use litigation finance not only to win business in a highly competitive market but to do so in ways that are extremely beneficial to their own businesses.


2016 litigation finance survey

V. Demographics


Law firm demographics


Less than 5036%

50 - 1002%

101 - 1503%

151 - 25013%

251 - 50022%

501 - 100019%

More than10005%

How many attorneys are employed by your firm?

Managing Partner29%

Partner57%

AdministrativeExecutive10%

Associate4%

What is your title?


Corporate demographics


$10 million to $99.9 million

5%$100 million to $999.9 million11%

$1 billion to $1.4 billion

5%

$1.5 to $9.9 billion39%

$10 billion or more40%

What is the approximate annual revenue of your company?

GC/CLO/CFO19%

Deputy GC/In-house Attorney79%

Finance staff2%

What is your role?


About the research

During the fourth quarter of 2015 and first quarter of 2016, online surveys were distributed to corporate in-house counsel and financial officers at the largest law firms and companies across the US. The results were tabulated, analyzed, and released in March 2016. For law firms, respondents identified themselves as Managing Partner (29%), Partner (57%), Administrative Executive (10%) and Associate (3%). Corporate respondents identified themselves as C-level (19%) legal and financial executives (GCs, Chief Legal Officers, CFO), Deputy/Assistant GCs and In-House Counsel (79%) and finance staff (3%).

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2016 litigation finance survey


About Burford Capital

Burford Capital is a leading global finance firm focused on law. Burford’s businesses include litigation finance, insurance and risk transfer, law firm lending, corporate intelligence and judgment enforcement, and a wide range of investment activities. Burford’s equity and debt securities are publicly traded on the London Stock Exchange. We work with lawyers and clients around the world from our principal offices in New York and London.

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Leading global finance firm focused on law


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ContactLiz [email protected]+1 212 235 6820

Click here to access the full 4th Annual Litigation Finance Survey, and here to access the prior survey.


http://www.burfordcapital.com/2016-US-Research

http://www.burfordcapital.com/tag/us-survey/